Should you chase the epic rally in Carvana (NYSE:CVNA)? In the past five days, Carvana stock has soared more than 43%. On Aug. 6 alone, shares made a 28% move higher. What’s the driver of all this?
You can’t really say it’s earnings. The company released results after hours Aug 6. But, while posting lower-than-expected losses, the company fell short of revenue estimates
However, that wasn’t enough to stop the bulls from bidding shares higher.
E-commerce names like this automotive retailer have been crushing it in the stay-at-home-economy. Sure, novel coronavirus lockdowns have mostly ended. But many believe that today’s new normal means an accelerated shift of consumer spending from traditional brick-and-mortar shopping to e-commerce.
Yet, many signs point to this being a bubble rather than a dramatic paradigm shift. But so far, those daring enough to go against the crowd have lost big. Nevertheless, although it’s impossible to call a top, we may be reaching a point where the party’s over for this too-hot-to-touch stock.
Carvana and the E-Commerce Bubble
As InvestorPlace’s Vince Martin wrote Aug 3, investors have been buying e-commerce growth stocks hand over fist. During the March pandemic sell-off, many of these names sold off dramatically. But, in the subsequent months, investors piled in, seeing the outbreak and its stringent lockdowns as a tailwind, instead of a headwind.
Carvana itself is up nearly ten-fold off its March lows. But, while the crisis has accelerated online car buying, has this company’s business really become ten times more valuable? Or, are those buying on FOMO, momentum and other non-fundamental factors just buying shares since this is a trade that’s been working so far?
Chances are its the latter. As Martin put it, “winners keep winning” in today’s market. With valuation taking a back seat to growth, the crowd doesn’t see a reason to stop bidding e-commerce plays higher.
So, what does that mean for those looking at Carvana stock today? Do you go with the crowd, since so far that’s been a simple path to profits? Or, do you take on big risk and go short, even when it’s impossible to tell when the music’s going to stop?
Granted, valuation alone isn’t a good reason to bet against Carvana. Sure, shares trade at multiples that price-in growth that’s years away. But it’s going to take a dramatic narrative change for this stock to do a 180.
Yet, such a change could be on the horizon.
Why Shares Could Fall From Here
Sure, it’s easy to formulate a bull case for Carvana stock right now. With the coronavirus accelerating e-commerce sales, the prospects for this industry disruptor remain strong. As long as social distancing and mask orders are in place, it’s easy to see many skipping out on traditional dealers and going with online-based car shopping.
Yet, there are many ways why the narrative pushing this stock higher could fizzle out. Firstly, As our Matt McCall discussed back in June, not even CarMax (NYSE:KMX) has been able to consolidate the fragmented used car industry. As McCall put it, that’s not to say this goal is impossible. But, if the company shows signs it can’t pull this off, shares could start trending lower.
Secondly, high demand trumping supply of used cars may get the better of Carvana. As this commentator recently wrote, rising used car prices are a double-edged sword for the company. At first glance, it sounds like a possible needle-mover.
But on closer inspection, it means the used car purveyor must pay more for inventory. On the other hand, traditional franchise dealers can procure used cars from sources like lease trade-ins. This alone shows the disruptor narrative is far from being a slam-dunk.
Lastly, a reversal in the overall story behind e-commerce stocks. Right now, there doesn’t appear to be any factor on the horizon to change the current narrative.
Yet, if a coronavirus vaccine hits the market later this year, all bets are off. If our in-limbo economy gets back to normal, investors may start to cash out of their stay-at-home economy plays.
Sure, e-commerce will retain much of the ground they’ve gained this year. But, probably not enough to sustain the three and four-digit price moves their respective share prices have seen in 2020.
It’s Time to Cash Out of Carvana Stock
Being bearish on e-commerce stocks hasn’t been a winning position so far this year. With the pandemic fueling what could be considered a bubble, those going against the grain have seen nothing but losses and regret.
Yet, while you can’t call a top, we may be reaching the peak with Carvana stock. If you bought in at lower prices, it’s high time to cash out. Otherwise, steer clear of shares for now.
Thomas Niel, contributor to InvestorPlace, has written single-stock analysis since 2016. As of this writing, Thomas Niel did not hold a position in any of the aforementioned securities.
